The UK stands to gain over €360m per annum going forward from the reforms, although the changes will impose new, onerous VAT burdens on UK small companies.

2015 B2C digital servies changes

From the 1 January 2015, the rules change on which country’s VAT rate to charge on B2C sales of digital services. Instead of charging the local VAT rate of the digital services provider, the VAT rate of the consumer must be levied instead. Since many large US electronic services providers have located their EU headquarters in Luxembourg for its low taxes on such services, this means a big shift in tax receipts from Luxembourg to the other 27 member states.

The UK estimates it will receive over €1.2bn in new UK VAT receipts between 2016 and 2018 as it will be receiving 20% UK VAT on each sale of an e-book or app to a UK consumer whereas previously Luxembourg would have received the VAT. Ireland has put its estimated gain at €300m over the next three years.

Luxembourg VAT losses on 2015

To stop Luxembourg blocking the new digital VAT changes, the other EU member states have had to promise parachute payments of up to €1.1 billion over 3 years. It will mean Luxembourg will receive 70% of the VAT in 2015, and then 15% in both 2016 and 2017. Luxembourg is raising its VAT rate 2% to 17% in 2015 to help fill the gap left by the digital services changes. But this will only raise an estimated €650m per annum compared to the estimated loss of €800m per annum.

And to fully comply with the new rules, any UK micro digital business currently under the £81,000 VAT registration threshold will have to register for VAT for the first time and make quarterly filings declaring their EU sales.

Richard Asquith is VP Global Indirect Tax at Avalara, helping businesses understand their compliance obligations as they grow globally. He is part of the European leadership team which this year won International Tax Review's Tax Technology Firm of the Year. Richard qualified as an accountant with KPMG in the UK, and went on to work in Hungary, Russia and France with EY.